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Jefferson County Commission

Jefferson County Commission. Discussion By Jeff Hager, CFO. Facts About the County. Named after Thomas Jefferson Founded in 1819 by the Alabama Legislature Population of nearly 700,000 Largest county in the state of Alabama Governed by 5 elected Commissioners Term of office is 4 years

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Jefferson County Commission

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  1. Jefferson County Commission Discussion By Jeff Hager, CFO

  2. Facts About the County • Named after Thomas Jefferson • Founded in 1819 by the Alabama Legislature • Population of nearly 700,000 • Largest county in the state of Alabama • Governed by 5 elected Commissioners • Term of office is 4 years • Department heads report directly to Commission

  3. Major Departments • Finance • General Services • Roads and Transportation • Environmental Services • Revenue Department • Health and Human Services • Information Technology • Human Resources • Board of Registrars • Land Planning

  4. Other Elected Positions • Treasurer • Tax Assessor • Tax Collector • Sheriff • District Attorney • State and District Courts

  5. Budget Information • Approximately $243MM for government activity revenue • Approximately $19MM for grant revenue • Approximately $220MM for enterprise fund revenue • Approximately $121MM for special revenue fund revenue • Total revenue $603MM

  6. Governmental Revenue • Property tax - $108MM • Sales tax - $36MM • Occupational tax and business license - $76MM • Other taxes and revenue $23MM

  7. Occupational Tax • 32% of governmental revenue • One of few purely general fund taxes • Enacted in 1967 • County levied in 1988 • Lawsuit filed almost immediately • County has successfully defended 16 lawsuits • In 1999, legislature, in a political attempt to strong arm the County, repealed the tax • 17th lawsuit prevailed in May, 2009 based on 1999 repeal • New tax enacted in August, 2009 • 18th lawsuit prevailed in December, 2010

  8. What does loss of occupational tax mean? • Tax funds operations such as: • Sheriff and jails • Finance • Human resources • General services • Roads and transportation • Courts • Satellite courthouses • Revenue department • Information technology • Board of registrars • Land planning

  9. Impact to Citizens • County has been operating on “thin” budgets for years • Capital spending has been deferred to the point where failures of equipment are inevitable • Level of services will be lowered • Delays in renewing tags and drivers licenses • Delays in processing deeds and mortgages • Reduction of public safety officers in community

  10. Possible Solutions • County does not have Home Rule • Legislature must enact any new taxes • Could include: • Occupational tax • Sales tax increase • Other? • Legislature could remove “earmarks” on existing taxes • Examples: • $41MM Indigent Health Care sales tax • $18MM Sales tax to Health Department • $7MM property tax to Health Department

  11. Debt Crisis • County has four major tranches of debt outstanding • General Obligation - $212MM • School warrants - $845MM • Public Building Authority - $85MM • Sewer warrants - $3.2B • Warrants were structured as Fixed, Variable and Auction Rate

  12. General Obligation • Collateral – Full faith and credit of County • Structure – Fixed, variable and auction rate • Fixed warrants are still in the open market • Variable and auction rate warrants were “put” back to the liquidity providers

  13. School Warrants • Collateral – 1% sales tax enacted for warrant issue • Used to “grant” to school systems in Jefferson County for capital improvements • Original issue was $1Billion • Currently in default due to downgrade of bond insurers

  14. Public Building Authority • Collateral – Lease revenue for public buildings • Used primarily to construct courthouse in Bessemer • Warrants in good standing currently

  15. Sewer Warrants • Collateral – Net sewer revenue • Does not cascade to General Fund • Structured with Fixed, Variable and Auction Rate • Used Swaps to synthetically make variable rate bonds fixed • Currently in default due to collapse of variable and auction rate bond market • Caused acceleration of principal and triggered payment default

  16. So, What Happened? • Early 1990’s, Cahaba River Society contacts EPA regarding sewer overflow entering Cahaba River • EPA files lawsuit against the County • Court puts County under a Consent Decree to bring sewer system in compliance with EPA • County is given 7 years to complete compliance • Workload compression for the area increases costs • Other systems in similar circumstances have been given 20 years to complete compliance

  17. Refinancing • As time progressed and additional capital dollars were needed and debt service requirements increased, County refinanced bonds • Banking advisors recommended exotic variable and auction rate warrants with swaps to make them fixed • Within a relevant range, lowered overall rate of interest of the warrants

  18. Market Collapse • Prior to the economic downturn of 2008, the County had managed to stay current on its debt service requirements • Variable and auction rate bonds are traded on weekly buy/sell transactions • Remarketing agent handles weekly trades • Enter housing/mortgage market collapse • Financial institutions need liquidity to cover losses on mortgages • Remarketing agent can no longer find buyer for warrants • Warrants are put to either bond insurers or liquidity providers

  19. Market Collapse • Agreements with bond insurers and liquidity providers require accelerated principal payments • Additionally, because collapse is widespread, bond insurers begin to fail • Downgrade of insurers trickles down to downgrade of bonds

  20. Effects on Borrower • Borrower has made debt service payments and in some cases has made advance payments • Due to no fault of borrower, rates are increased and principal payments accelerated • The creditors now place the borrower in default for not making the accelerated payments • Additionally, since reserve funds for bonds are supported by bond insurance, downgrade of insurers causing a shortfall in reserve funds

  21. Example • Suppose you have a mortgage for a $250,000 house • Interest rate 6.25% for 30 years • Your payment is $1,539 per month • You make regular payments and even some additional payments • Due to market activities, your rate goes to 10% and the term changes to 5 years • Your payment now goes to $5,312 per month • You are now unable to make the payments and the mortgage company declares you in default and forecloses on the house

  22. Reality for Sewer Debt • System cannot sustain $3.2B in debt • Even with significant rate increases, shortfall in debt service is significant • Many factors contributed to the size of the debt for the system • Solution will require a negotiated reduction in the outstanding principal • Court appointed receiver is in place to help find a resolution

  23. Questions?

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